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Computation of 'exempted value of services' for 'trading activity' - CBEC should intervene


Cenvat credit attributable to trading

(1) Explanation to the effect “exempted services” includes trading, as introduced by Notification No. 3/2011-CE (NT) dated 1.3.2011 does not exist after substitution of Rule 2(e) of Cenvat Credit Rules, 2004, vide Notification No. 28/2012-CE(NT) dated 20.6.2012 w.e.f. 1.7.2012. However, from the same date, “trading of goods” is covered under Negative list of services, under Section 66D(e) of the Finance Act, 1994. Consequently, trading of goods is covered under the definition of “exempted service”, being a service on which no service tax is leviable, as defined at the substituted Rule 2(e)(2).

(2) Prior to 1.3.2011, trading was not covered under any definitions of “taxable service”, “exempted service” or “output service”. So, the INDIVISIBLE PORTION of common input services like insurance, telephone etc. (not covered under the inclusive portion of the definition of “input service”), which was used for trading, could not be considered as “input service” at all and so no Cenvat credit was admissible on that INDIVISIBLE PORTION. If assessee takes Cenvat credit on such common input services, there was no prescribed method to calculate pro-rata reversal of credit attributable to such INDIVISIBLE PORTION. The solution to this situation has been given by CESTAT in the case of Orion Appliances Ltd. 2010-TIOL-752-CESTAT-AHM, which is as under:

“The only obvious solution which would be legally correct appears to be to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is deducted and the balance only availed for the purpose of payment of service tax of output service.”

It is not known which are the ‘standard accounting principles’ applicable to work out such credit attributed to trading. Perhaps audit objection referred by the author is based on the aforesaid case.

These are personal views.

Shvetal Parikh 16/09/2014

 

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